Bringing you live news and features since 2006 

Hedged high yield bonds and bank loans can help in rising rate environment, says Rodilosso


Hedged high yield bond and bank loan strategies can help limit risks associated with a rising interest rate environment, according to Fran Rodilosso, fixed income portfolio manager with Market Vectors ETFs.

However, hedged high yield bond strategies outperformed bank loan strategies during 2013’s rising interest rate environment, spurred on by the summer’s “taper”-focused concerns and the ultimate tapering that took place in December.
Rising over 100 basis points each since the beginning of the year, the five-year and 10-year Treasury yields closed 2013 at 1.75 per cent and 3.04 per cent, respectively.
“Hedged high yield bonds and leveraged loans both help limit interest rate duration,” says Rodilosso. “Leveraged loan strategies saw the vast majority of inflows in 2013. But a handful of factors may make the hedged high yield approach worthy of closer consideration if 2014 is going to be a year of rising interest rates.”
Factors benefitting hedged high yield bonds over bank loans last year included:
1) Narrowing credit spreads: as seen after September when no action was taken by the Federal Reserve to taper quantitative easing
2) Long high yield bond/short US Treasury positioning: has historically been more responsive to changes in credit spreads than the floating rate mechanism employed by bank loans
3) High yield bonds’ generally longer duration and somewhat stronger call protection: bank loans can re-price and lose appreciation potential when credit markets rally
Rodilosso also points out that while bank loans are senior secured and higher in the capital structure than high yield bonds, bank loans tend to be less liquid in secondary trading. Rodilosso says when credit spreads widen significantly and interest rates fall, hedged high yield bond strategies present a risk of loss and tend to underperform bank loans.
“For investors who value liquidity and who believe rising interest rates are on the way, the hedged high yield bond approach may be worth a closer look.”

Latest News

As the ETF industry reaches a milestone of USD12.71 trillion in global assets, Brown Brothers Harriman writes that its 2024..
Matteo Greco, Research Analyst at Fineqia International writes that bitcoin closed last week at approximately USD66,300, marking a 7.8 per..
HSBC Asset Management’s (HSBC AM) ETF and Indexing business has passed USD100 billion in assets under management (AUM), reflecting its..
Amundi’s ETF Market Flows Analysis for April reveals that investors added EUR54.1 billion to global ETFs in April with equities..

Related Articles

Dan Miller, IQ-EQ
With just over a week to go till T+1 settlement begins in North America, Canada and Mexico, time is of...
Emily Spurling, Nasdaq
Last October’s ETF Express US Awards 2023 found Nasdaq winning Best Index Provider – ESG ETFs and Best Index Provider...
Vinit Srivistava, MerQube
Index provider, MerQube, launched in 2019, with the aim of providing a “technology-driven answer to the most complex, rules-based investment...
Sean O' Hara
Pacer ETFs has announced the launch of three Cash Cows UCITS ETFs. The firm writes that this will give European...
Subscribe to the ETF Express newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by